Mortgage Loans on Real Estate

Our mortgage loan portfolio, summarized in the following table, totaled $2.6 billion at June 30, 2013 and December 31, 2012, with commitments outstanding of $93.8 million at June 30, 2013.



	June 30, 2013			December 31, 2012
	(Dollars in thousands)
Principal outstanding	$	2,616,179		$	2,658,883
Loan loss allowance	(31,676		)	(34,234		)
Deferred prepayment fees	(800		)	(709		)
Carrying value	$	2,583,703		$	2,623,940

The portfolio consists of commercial mortgage loans collateralized by the related properties and diversified as to property type, location and loan size. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and other criteria to attempt to reduce the risk of default. The mortgage loan portfolio is summarized by geographic region and property type as follows:



	June 30, 2013				December 31, 2012
	Principal Outstanding		Percent		Principal Outstanding		Percent
	(Dollars in thousands)
Geographic distribution
East	$	760,025	29.1	%	$	732,762	27.5	%
Middle Atlantic	147,167		5.6	%	155,094		5.8	%
Mountain	359,436		13.7	%	387,599		14.6	%
New England	23,131		0.9	%	26,385		1.0	%
Pacific	322,519		12.3	%	320,982		12.1	%
South Atlantic	459,052		17.6	%	458,802		17.3	%
West North Central	369,363		14.1	%	370,168		13.9	%
West South Central	175,486		6.7	%	207,091		7.8	%
	$	2,616,179	100.0	%	$	2,658,883	100.0	%
Property type distribution
Office	$	643,747	24.6	%	$	666,467	25.1	%
Medical Office	137,746		5.3	%	136,764		5.1	%
Retail	680,618		26.0	%	677,951		25.5	%
Industrial/Warehouse	666,935		25.5	%	692,637		26.1	%
Hotel	83,363		3.2	%	94,045		3.5	%
Apartment	233,609		8.9	%	219,335		8.2	%
Mixed use/other	170,161		6.5	%	171,684		6.5	%
	$	2,616,179	100.0	%	$	2,658,883	100.0	%

We evaluate our mortgage loan portfolio for the establishment of a loan loss reserve by specific identification of impaired loans and the measurement of an estimated loss for each individual loan identified. A mortgage loan is impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. If we determine that the value of any specific mortgage loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash flows from the loan discounted at the loan's effective interest rate, or the fair value of the underlying collateral less estimated costs to sell. In addition, we analyze the mortgage loan portfolio for the need of a general loan allowance for probable losses on all other loans. The amount of the general loan allowance is based upon management's evaluation of the collectability of the loan portfolio, historical loss experience, delinquencies, credit concentrations, underwriting standards and national and local economic conditions.

Our financing receivables currently consist of one portfolio segment which is our commercial mortgage loan portfolio. These are mortgage loans with collateral consisting of commercial real estate and borrowers consisting mostly of limited liability partnerships or limited liability corporations.

We have a population of mortgage loans that we have been carrying with workout terms (e.g. interest only periods, period of suspended payments, etc.) and a population of mortgage loans that have been in a delinquent status (i.e. more than 60 days past due). It is from this population that we have been recognizing some impairment loss due to nonpayment and, in some cases, eventual satisfaction of the loan by taking ownership of the collateral real estate. In most cases the fair value of the collateral less estimated costs to sell such collateral has been less than the outstanding principal amount of the mortgage loan.

Our general loan loss allowance for the period ended June 30, 2012 was calculated utilizing a group of loans which had a debt service coverage ratio (DSCR) of less than 1.0. The DSCR is calculated by dividing the net operating income of the mortgaged property by the contractual principal and interest payment due for the corresponding period. We developed the loss rates to apply to this group of loans by dividing the specific impairment loss for the most recent 4 quarters by the principal outstanding of the loans with a DSCR of less than 1.0.

Currently, we rate the mortgage loans in our portfolio based on factors such as historical operating performance, loan to value ratio and economic outlook, among others. We calculate a loss factor to apply to each rating based on historical losses we have recognized in our mortgage loan portfolio. We apply the loss factors to the total principal outstanding within each rating category to determine an appropriate estimate of general loan loss allowance at June 30, 2013. We began this process in the third quarter of 2012.

The following tables present a rollforward of our specific and general valuation allowances for mortgage loans on real estate:



	Three Months Ended June 30, 2013						Three Months Ended June 30, 2012
	Specific Allowance			General Allowance			Specific Allowance			General Allowance
	(Dollars in thousands)
Beginning allowance balance	$	(22,631	)	$	(10,400	)	$	(29,595	)	$	(10,300	)
Charge-offs	2,612			—			7,613			—
Recoveries	—			—			—			—
Provision for credit losses	(1,157		)	(100		)	(3,463		)	(900		)
Ending allowance balance	$	(21,176	)	$	(10,500	)	$	(25,445	)	$	(11,200	)



	Six Months Ended June 30, 2013						Six Months Ended June 30, 2012
	Specific Allowance			General Allowance			Specific Allowance			General Allowance
	(Dollars in thousands)
Beginning allowance balance	$	(23,134	)	$	(11,100	)	$	(23,664	)	$	(9,300	)
Charge-offs	4,181			—			8,513			—
Recoveries	—			—			—			—
Provision for credit losses	(2,223		)	600			(10,294		)	(1,900		)
Ending allowance balance	$	(21,176	)	$	(10,500	)	$	(25,445	)	$	(11,200	)

The specific allowance is a total of credit loss allowances on loans which are individually evaluated for impairment. The general allowance is the group of loans discussed above which are collectively evaluated for impairment. The following table presents the total outstanding principal of loans evaluated for impairment by basis of impairment method:



	June 30, 2013		December 31, 2012
	(Dollars in thousands)
Individually evaluated for impairment	$	46,707	$	53,110
Collectively evaluated for impairment	2,569,472		2,605,773
Total loans evaluated for impairment	$	2,616,179	$	2,658,883

The amount of charge-offs include the amount of allowance that has been established for loans that were satisfied by taking ownership of the collateral. When the property is taken it is recorded at its fair value as a component of other investments and the mortgage loan is recorded as fully paid, with any allowance for credit loss that has been established charged off. Fair value of the real estate is determined by third party appraisal. There could be other situations that develop where we have established a larger specific loan loss allowance than is needed based on increases in the fair value of collateral supporting collateral dependent loans, or improvements in the financial position of a borrower so that a loan would become reliant on cash flows from debt service instead of dependent upon sale of the collateral. Charge-offs of the allowance would be recognized in those situations as well. We define collateral dependent loans as those mortgage loans for which we will depend on the value of the collateral real estate to satisfy the outstanding principal of the loan.

During the second quarter of 2013, no mortgage loans were satisfied by taking ownership of any real estate serving as collateral and during the six months ended June 30, 2013, one mortgage loan was satisfied by taking ownership of the real estate serving as collateral compared to four and six mortgage loans for the same periods in 2012. The following table summarizes the activity in the real estate owned which was obtained in satisfaction of mortgage loans on real estate:



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Real estate owned at beginning of period	$	28,764		$	35,824		$	33,172		$	36,821
Real estate acquired in satisfaction of mortgage loans	—			8,683			844			11,985
Additions	480			117			480			117
Sales	(2,333		)	(4,283		)	(7,413		)	(7,366		)
Impairments	(145		)	(1,669		)	(145		)	(2,643		)
Depreciation	(157		)	(282		)	(329		)	(524		)
Real estate owned at end of period	$	26,609		$	38,390		$	26,609		$	38,390

We analyze credit risk of our mortgage loans by analyzing all available evidence on loans that are delinquent and loans that are in a workout period.



	June 30, 2013		December 31, 2012
	(Dollars in thousands)
Credit Exposure--By Payment Activity
Performing	$	2,572,527	$	2,597,440
In workout	28,326		26,723
Collateral dependent	15,326		34,720
	$	2,616,179	$	2,658,883

Mortgage loans are considered delinquent when they become 60 days past due. When loans become 90 days past due, become collateral dependent or enter a period with no debt service payments required we place them on non-accrual status and discontinue recognizing interest income. If payments are received on a delinquent loan, interest income is recognized to the extent it would have been recognized if normal principal and interest would have been received timely. If payments are received to bring a delinquent loan back to current we will resume accruing interest income on that loan. Outstanding principal of loans in a non-accrual status at June 30, 2013 and December 31, 2012 totaled $15.3 million and $34.7 million, respectively.

All of our commercial mortgage loans depend on the cash flow of the borrower to be at a sufficient level to service the principal and interest payments as they come due. In general, cash inflows of the borrowers are generated by collecting monthly rent from tenants occupying space within the borrowers' properties. Our borrowers face collateral risks such as tenants going out of business, tenants struggling to make rent payments as they become due, and tenants canceling leases and moving to other locations. We have a number of loans where the real estate is occupied by a single tenant. Our borrowers sometimes face both a reduction in cash flow on their mortgage property as well as a reduction in the fair value of the real estate collateral. If borrowers are unable to replace lost rent revenue and increases in the fair value of their property do not materialize we could potentially incur more losses than what we have allowed for in our specific and general loan loss allowances.

Aging of financing receivables is summarized in the following table, with loans in a "workout" period as of the reporting date considered current if payments are current in accordance with agreed upon terms:



	30 - 59 Days		60 - 89 Days		90 Days and Over		Total Past Due		Current		Collateral Dependent Receivables		Total Financing Receivables
	(Dollars in thousands)
Commercial Mortgage Loans
June 30, 2013	$	—	$	—	$	—	$	—	$	2,600,853	$	15,326	$	2,616,179
December 31, 2012	$	—	$	—	$	—	$	—	$	2,624,163	$	34,720	$	2,658,883

Financing receivables summarized in the following table represent all loans that we are either not currently collecting or those we feel it is probable we will not collect all amounts due according to the contractual terms of the loan agreements (all loans that we have worked with the borrower to alleviate short-term cash flow issues, loans delinquent for more than 60 days at the reporting date, loans we have determined to be collateral dependent and loans that we have recorded specific impairments on that we feel may continue to have performance issues).



	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
June 30, 2013
Mortgage loans with an allowance	$	25,531	$	46,707	$	(21,176	)	$	27,923	$	885
Mortgage loans with no related allowance	18,699		18,699		—			18,760		531
	$	44,230	$	65,406	$	(21,176	)	$	46,683	$	1,416
December 31, 2012
Mortgage loans with an allowance	$	29,976	$	53,110	$	(23,134	)	$	37,480	$	1,946
Mortgage loans with no related allowance	27,765		27,765		—			27,696		1,664
	$	57,741	$	80,875	$	(23,134	)	$	65,176	$	3,610

The loans that are categorized as "in workout" consist of loans that we have agreed to lower or no mortgage payments for a period of time while the borrowers address cash flow and/or operational issues. The key features of these workouts have been determined on a loan-by-loan basis. Most of these loans are in a period of low cash flow due to tenants vacating their space or tenants requesting rent relief during difficult economic periods. Generally, we have allowed the borrower a six month interest only period and in some cases a twelve month period of interest only. Interest only workout loans are expected to return to their regular debt service payments after the interest only period. Interest only loans that are not fully amortizing will have a larger balance at their balloon date than originally contracted. Fully amortizing loans that are in interest only periods will have larger debt service payments for their remaining term due to lost principal payments during the interest only period. In limited circumstances we have allowed borrowers to pay the principal portion of their loan payment into an escrow account that can be used for capital and tenant improvements for a period of not more than twelve months. In these situations new loan amortization schedules are calculated based on the principal not collected during this twelve month workout period and larger payments are collected for the remaining term of each loan. In all cases, original interest rate and maturity date have not been modified and we have not forgiven any principal amounts.

A Troubled Debt Restructuring ("TDR") is a situation where we have granted a concession to a borrower for economic or legal reasons related to the borrower's financial difficulties that we would not otherwise consider. A mortgage loan that has been granted new terms, including workout terms as described previously, would be considered a TDR if it meets conditions that would indicate a borrower is experiencing financial difficulty and the new terms constitute a concession on our part. We analyze all loans where we have agreed to workout terms and all loans that we have refinanced to determine if they meet the definition of a TDR. We consider the following factors in determining whether or not a borrower is experiencing financial difficulty:


•	borrower is in default,


•	borrower has declared bankruptcy,


•	there is growing concern about the borrower's ability to continue as a going concern,


•	borrower has insufficient cash flows to service debt,


•	borrower's inability to obtain funds from other sources, and


•	there is a breach of financial covenants by the borrower.

If the borrower is determined to be in financial difficulty, we consider the following conditions to determine if the borrower was granted a concession:


•	assets used to satisfy debt are less than our recorded investment,


•	interest rate is modified,


•	maturity date extension at an interest rate less than market rate,


•	capitalization of interest,


•	delaying principal and/or interest for a period of three months or more, and


•	partial forgiveness of the balance or charge-off.

Mortgage loan workouts, refinances or restructures that are classified as TDRs are individually evaluated and measured for impairment. A summary of mortgage loans on commercial real estate with outstanding principal at June 30, 2013 and December 31, 2012 that we determined to be TDRs are as follows:



Geographic Region	Number of TDRs	Principal Balance Outstanding		Specific Loan Loss Allowance			Net Carrying Amount
		(Dollars in thousands)
June 30, 2013
East	1	$	3,712	$	(949	)	$	2,763
Mountain	8	23,019		(1,172		)	21,847
South Atlantic	7	17,249		(5,898		)	11,351
East North Central	2	3,697		(1,029		)	2,668
West North Central	1	1,938		—			1,938
West South Central	1	1,458		(255		)	1,203
	20	$	51,073	$	(9,303	)	$	41,770
December 31, 2012
East	1	$	4,208	$	(1,425	)	$	2,783
Mountain	10	28,786		(1,702		)	27,084
South Atlantic	9	23,358		(5,047		)	18,311
East North Central	1	2,232		(467		)	1,765
West North Central	3	9,466		(2,328		)	7,138
	24	$	68,050	$	(10,969	)	$	57,081